What is a Director’s Loan Account “DLA”?

Directors of a company can sometimes forget that the company is a separate legal entity for accounts and tax purposes, and therefore that certain transactions between a company and its director may give rise to a debtor or creditor relationship i.e. money is owing as between the company and the director.  Typically, this financial relationship is managed via a DLA which records transactions between the company and the director.

At each year end for the company the DLA will either show a balance owed to the company or a balance owed from the company. It is important to understand the implications of either eventuality both for the company and the directors.

Examples of transactions which you would find in a DLA include (but are not limited to):

• Withdrawals of money
• Unpaid mileage claims
• Unpaid/overpaid director salaries
• Expenses paid for personally on behalf of the company
• Personal expenses the company has paid for on behalf of the director
• Declared dividends not withdrawn from the company
• Personal assets introduced into the company by the director
• Unpaid consideration for shares upon incorporation
• Beneficial loan interest

What if I owe my company money?

Throughout any given year there may be times when you owe your company money. Two things to consider here are tax and interest.

Interest

The company is entitled, but not obligated, to charge interest on a loan to a director.  If at any point during an accounting period the company is owed more than £10,000, a benefit in kind arises to the extent that loan interest calculated at HMRC’s ‘official rate’ exceeds any interest actually paid by the director. The official rate of interest is currently 2.25%. It is therefore not unusual for a company to charge the director interest at the official rate in order to avoid a benefit in kind arising. The interest is included in the accounts as taxable income and it increases the amount owed from the director.

As above, if the interest paid is less than HMRC’s official rate of interest, the benefit is reportable on form P11D.

Tax

Tax under Section 455 CTA 2010, currently at 33.75%, is due when the DLA is overdrawn at the end of an accounting period. To avoid paying the tax, you have the option to repay your loan account within 9 months of your year-end.  There is anti-avoidance legislation to prevent directors repaying and then re-withdrawing the loan.

It is important to note that s.455 tax will be repaid to the company once the DLA is settled, but only 9 months after the year end in which the DLA is repaid. The repayment, however, is not automatic. This is something your accountant will have to request for you.

What if the company owes me money?

If you are owed money you can withdraw this tax-free at any point in time. You also have the option of charging the company interest. However, you should take into consideration your personal income as the interest earned on the loan will be reportable on your personal tax return therefore additional tax may be due as a result. You can however earn up to £1,000 [£500 for higher-rate taxpayers] in interest tax-free so it is potentially worth considering, depending on your personal circumstances.

It is important to note that where a company pays interest to a director, it must deduct income tax at 20% from the interest and report this to HMRC quarterly on form CT61.

Summary

It is key to monitor and understand the position of your DLA in order to avoid any unforeseen tax and interest.